USC GOULD SCHOOL OF LAW
TAX INSTITUTE 2011
LOS ANGELES, CA
January 24-26, 2011
CURRENT DEVELOPMENTS IN
CORPORATE TAX
Mark J. Silverman
Steptoe & Johnson LLP
- 2 -
Mark J. Silverman
Mark J. Silverman is a partner in the Washington office of Steptoe & Johnson LLP. Mr. Silverman was named one of the top ten tax lawyers in Washington in 2005 by Legal Times. He is a member of The American Law Institute, Tax Advisory Group for the Study of Subchapter C of the Internal Revenue Code. He was formerly an advisor to the Committee on Ways and Means during their consideration of revisions to the corporate tax provisions of the Internal Revenue Code. He is a Fellow of the American College of Tax Counsel. Mr. Silverman was formerly a Council member of the American Bar Association, Section of Taxation and was formerly Chair of the Corporate Tax Committee. He chaired the Tax Section Task Force on Leveraged Buyouts. Mr. Silverman co−authored the Tax Advisors Planning Series on Financially Troubled Businesses. Mr. Silverman is currently a member of the advisory boards of BNA Tax Management, Consolidated Returns Tax Report, M&A Tax Report, and Corporate Taxation magazines. Mr. Silverman is on the Editorial Board of The American Journal of Tax Policy, and is on the Board of Trustees of the
Southern Federal Tax Institute. Mr. Silverman chairs the ALI−ABA annual consolidated returns program. He was formerly Corporate Tax Editor of The Journal of Taxation, and a member of the advisory boards of NYU Institute on Federal Taxation. Mr. Silverman was formerly a member of the Executive Committee of the New York State Bar Association. In addition, he is an Adjunct Professor of Law at Georgetown University Law Center and was formerly attorney−advisor to Judge Samuel B. Sterrett of the United States Tax Court. Mr. Silverman is a frequent speaker on tax matters and has published numerous articles on the subject.
1330 Connecticut Avenue, NW Washington, DC 20036 TEL: 202.429.6450 FAX: 202.429.3902 [email protected] AREAS OF PRACTICE Corporate Tax Transactions Government Affairs & Public Policy
IRS Controversy & Tax Litigation
Legislative and
Administrative, Congress and Treasury
Mergers & Acquisitions Partnerships/LLCs/S Corporations Strategic Alliances/Joint Ventures Tax EDUCATION Indiana University, B.S., 1967
Suffolk University Law School, J.D., 1970 New York University School of Law LL.M., 1971 BAR & COURT
ADMISSIONS District of Columbia New York
Planning & Transactional Practice
Mr. Silverman focuses on planning and transactional matters. He has extensive experience in structuring acquisitions, mergers, and spin−off transactions for large public corporations, as well as closely held businesses. He has authored a book on the tax consequences of financially troubled businesses and advises corporations on consolidated return issues. Mr. Silverman advises leverage buyout groups, venture capitalists and privately held commercial real estate developers with respect to various transactional matters. He is often called upon to advise the Internal Revenue Service, Treasury Department, and the staffs of the Congressional tax writing committees with respect to corporate tax issues.
Tax Policy Practice
A significant part of Mr. Silverman's practice involves the resolution of tax policy issues before Congress and the Treasury Department. These issues arise in the context of pending or proposed legislation and proposed Treasury Department regulations. Mr. Silverman is currently meeting with members of Congress and their staffs on many of the corporate tax provisions proposed by the
Administration and by members of Congress (including corporate spin−offs, financial product provisions, and corporate capital gains).
Audit & Controversy
Mr. Silverman also handles audit and controversy matters. He has extensive experience negotiating with field agents, appeals officers and district counsel in settling significant audit issues. Mr. Silverman
frequently prepares technical advice requests and often meets with National Office officials with respect to audit and tax litigation matters. Recently, Mr. Silverman was successful in negotiating global tax shelter settlements with the IRS.
- 4 -
Noteworthy
Received a #1 Ranking, Chambers USA 2010: America's Leading Business Lawyers; Tax (District of Columbia)
Ranked, Chambers Global 2008−2010: The World's Leading Lawyers for Business — Tax: Corporate (US)
Distinguished as a Top 100 attorney in Washington, DC Super Lawyers
Listed in Washington, DC Super Lawyers 2007−2010
Listed in Best Lawyers in America 2011 for Corporate Law, Mergers & Acquisitions Law, and Tax Law
Mentioned in Legal 500 US 2008−2010 for Tax
Listed in Who's Who Legal for Corporate Tax in 2007−2010
Listed among the "Top Lawyers in Washington" by Washingtonian, 2009 Ranked, PLC Cross−border Tax on
Corporate Transactions Handbook 2008/09 Named Among the “Top Ten Tax Lawyers in
Washington, DC” by Legal Times, 2005 Former advisor to Committee on Ways &
Means Counsel, ABA, Tax Section
Chair, Corporate Tax Committee, ABA, Tax Section
Advisory Board Member, NYU Institute and BNA Tax Management
Member, Board of Trustees, Southern Federal Tax Institute
Adjunct Professor, Georgetown University Law Center
TABLE OF CONTENTS
Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or
recommending to another party any plan or arrangement addressed herein.
LEGISLATIVE DEVELOPMENTS
Legislative Developments...1
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ...2
Education Jobs and Medicaid Assistance Act ...3
Section 304 Redemptions by Foreign Subsidiaries ...4
Job Creation and Tax Cut Act of 2010 ...7
Gain Recognized in Certain Divisive D Reorganizations...9
Repeal of Boot-Within-Gain Limitation...11
Taxation of Carried Interest ...14
Analysis of Carried Interest Proposal ...17
Investment Services Partnership Interest (ISPI) ...18
Qualified Capital Interest (QCI) Exception ...23
Consequences Relevant to Corporations ...26
Other Recent Legislative Developments...30
American Recovery and Reinvestment Act of 2009...31
Addition of Section 382(n) ...32
Repeal of Notice 2008-83 ...33
Section 108(i)...34
Amendment of Section 172: Small Business NOL...35
- 6 -
ADMINISTRATIVE DEVELOPMENTS AND CASELAW
Schedule UTP...39
Background...40
Final Schedule UTP – Significant Changes from Draft Schedule...41
Schedule UTP Filing Requirement ...42
Reporting Uncertain Tax Positions on Schedule UTP...43
Information Required in Schedule UTP ...44
Coordination with Other Reporting Requirements ...45
LB&I Directive on Implementation of Schedule UTP ...46
Announcement 2010-76 – Modification to IRS Policy of Restraint...47
United States v. Textron...48
United States v. Textron...49
Step Transaction...52
King Enterprises Transaction ...53
Rev. Rul. 2001-46 – Situation 1...54
Rev. Rul. 2001-46 – Situation 2...55
Final Treas. Reg. § 1.338(h)(10)-1(c)(2), (e)...56
King Enterprises Transaction – Variation...57
King Enterprises Transaction – Variation...58
Rev. Rul. 2008-25...59
Merrill Lynch v. Commissioner...60
P.L.R. 200427011 ...64
Heinz Transaction ...65
Heinz – Court of Federal Claims ...66
Schering-Plough Corp. v. United States...69
Step Transaction & Temp. Treas. Reg. § 1.1502-13T(f)(5)(ii)(B)...74
Treas. Reg. § 1.1502-13(f)(5) – In General ...75
Temp. Treas. Reg. § 1.1502-13T(f)(5)(ii)(B) ...76
Nonqualified Preferred Stock in Reorganizations...79
Use of Nonqualified Preferred Stock – Example 1...80
Use of Nonqualified Preferred Stock – Example 2...81
Liquidation / Reincorporation: Rev. Rul. 69-617...82
Rev. Rul. 69-617...83
Rev. Rul. 69-617 (Variation) ...84
Rev. Rul. 69-617 & The New Bausch & Lomb Regulations...85
Rev. Rul. 69-617 (Variation) & The New Bausch & Lomb Regulations...86
Rev. Rul. 69-617 vs. Drop & Upstream Merger – P.L.R. 200733002 ...87
P.L.R. 200733002 – Variation - Double Drop and Liquidation ...88
“D” Reorganizations...89
‘D’ Reorganizations – Stock...90
‘D’ Reorganizations – Cash - Rev. Rul. 70-240 ...91
‘D’ Reorganizations – Temporary Regulations ...92
‘D’ Reorganizations – Final Regulations...93
‘D’ Reorganizations – Direct Ownership ...97
‘D’ Reorganizations – Indirect Ownership...98
‘D’ Reorganizations – Constructive Ownership ...99
‘D’ Reorganizations – P.L.R. 200551018...100
Final Regulations – Deemed Stock...101
Final Regulations – Triangular Reorganizations ...102
‘D’ Reorganizations – Stock Sale & Deemed Liquidation...103
Check-and-Sell Transaction...104
Cross-Chain Section 351 Exchange...105
Temporary Regulations Under Section 304 ...106
Temporary Regulations under Section 304...107
- 8 -
Final Regulations on Apportionment of Tax Items Among Controlled Group
Members...109
Final Regulations on Apportionment of Tax Items Among Controlled Group Members...110
Contingent Liabilities...111
Contingent Liabilities in Taxable Asset Acquisitions ...112
Contingent Liabilities: Assumed Obligation?...114
Consequences of an Assumed Liability...120
Consequences of an Assumed Liability: To the Seller ...121
Consequences of an Assumed Liability: To the Buyer...125
Contingent Liabilities: Section 338(h)(10) ...128
Economic Bailout Developments /Section 382 Developments...129
Notices Affecting Section 382...130
Notice 2008-76: Application of Section 382(m) to Housing Act Acquisitions...131
Notice 2008-84: Acquisitions Not Described in Notice 2008-76...132
Notice 2008-83: Application of Section 382(h) to Banks ...133
Repeal of Notice 2008-83 ...134
Notice 2008-100: Section 382 and CPP Acquisitions ...135
Notice 2009-38: Expansion of Notice 2008-100 to Other EESA Programs...136
Notice 2009-38: Operating Rules ...137
Notice 2010-2: Expansion of Notice 2009-38 ...140
Section 382 and Capital Contributions...141
Capital Contributions Under Section 382(l)(1)...142
Notice 2008-78...144
Notice 2008-78: Safe Harbors ...145
Additional Section 382 Guidance...148
Notice 2010-49: Small Shareholders ...149
Section 382(l)(3)(C): Fluctuations in Value...151
Section 382(l)(3)(C): Fluctuations in Value ...152
Fluctuation in Value – Example 2 ...155
Fluctuation in Value – Example 3 ...156
Fluctuation in Value – Example 4 ...157
Fluctuation in Value – Example 5 ...158
Notice 2010-50: Fluctuations in Stock Value...159
Troubled Companies...161
Cancellation of Debt and Section 108...162
Overview...163
In General...164
Cancellation of Debt – Basic Example ...166
Debt Cancellation and Modification: Section 108(a)-(e)...167
Debt-for-Cash ...168
Debt-for-Property...169
Debt-for-Debt...170
Debt Modification...171
Debt-for-Stock ...172
Capital Contribution of Debt ...173
Section 108(i)...174
Section 108(i)...175
Election to Defer COD income...177
Definition of terms...179
OID Deferral Rule – Debt-for-Debt Exchanges ...181
Section 108(i) – Other rules...183
Section 108(i) – Temporary Regulations for C Corporations...184
Mandatory Acceleration Events for Deferred COD Income ...185
Net Value Acceleration Rule ...186
- 10 -
Example 2 – Cessation of Corporate Existence...189
Earnings and Profits...190
Deferred OID Deductions ...191
Effective Dates...193
Section 108(i) – Consolidation...194
Section 108(i) – Temporary Regulations...195
Section 108(i) – Consolidation ...199
Example 1 – Section 108(i) Election ...200
Example 2 – Deconsolidation of Debtor Member ...201
Example 3 – Section 108(i)(2) – Basic Illustration ...202
Example 4 – Section 108(i)(2) – Consolidated Issues ...203
Example 5 – DSR Approach (Inbound with Debt)...204
Example 6 – Intragroup Section 108(i)...205
Example 7 – Intragroup Section 108(i)...206
Insolvency and Liability Issues...207
Rev. Rul. 2003-125...208
P.L.R. 201006003 – Section 165(g)(3)(B)...212
P.L.R. 201011003 – Section 165(g)(3)(B)...213
Liquidations and Upstream Mergers...214
In General...215
Liquidations vs. Upstream Merger ...217
Liquidation with No Payment on Common Stock...218
Deemed Liquidation...219
Revenue Ruling 68-602 ...220
Revenue Ruling 68-602 – Variation ...221
CCA 200818005 ...222
Creditor Continuity of Interest...223
Final Regulations on Creditor Continuity of Interest ...224
Proposed Basis Allocation Regulations...227
Proposed Basis Allocation Regulations ...228
Distributions Under Section 301...229
Dividend Equivalent Redemptions ...230
Dividend Equivalent Reorganizations ...232
Non-Dividend Equivalent Reorganizations ...236
Other Issues Related to Redemptions ...237
Section 351 Exchanges ...238
Capital Contributions and Certain Section 351 Exchanges ...239
Codification of Economic Substance...240
Economic Substance Codification ...241
Economic Substance – Section 7701(o) ...245
New Section 7701(o) ...246
Notice 2010-62...248
When Does the Doctrine Apply – In General...251
When Does the Doctrine Apply – Congressional Plan or Purpose...253
When Does the Doctrine Apply – Certain Credits...256
When Does the Doctrine Apply – “Safe Harbors” ...257
When Does the Doctrine Apply – Disaggregation ...261
The Two Prong Test – The Objective Component ...262
The Two Prong Test – The Subjective Component...266
Individual Exception...268
Economic Substance – Strict Liability Penalty...269
ES Codification – Penalties ...270
Economic Substance – LMSB Directive on Imposition of Penalty...276
- 12 -
ES Doctrine – Summary ...286
Recent Economic Substance Cases...287
Coltec Transaction ...288
Coltec Decision – Court of Federal Claims ...289
Coltec on Appeal – Federal Circuit ...291
Coltec Cert Petition...294
Heinz Transaction ...295
Heinz – Court of Federal Claims ...296
Jade Trading – Son-of-Boss Transaction ...299
Jade Trading – Taxpayer’s Position...300
Jade Trading – Court of Federal Claims ...301
Jade Trading – Federal Circuit ...302
Sala v. United States...303
Sala v. United States – District Court Decision...305
Sala v. United States – Tenth Circuit Decision...307
Countryside – Facts of Transaction ...308
Countryside – Tax Issues ...309
Countryside – Economic Substance...310
Countryside – Effect of Continued Litigation?...311
Countryside and Valero – Section 7525 ...312
Shell Petroleum – Facts of Transaction ...313
Shell Petroleum – IRS Challenge ...315
Shell Petroleum – District Court Decision...316
Klamath Strategic Investment Fund v. United States – Facts...317
Klamath Strategic Investment Fund v. United States – District Circuit Decision ...318
Klamath Strategic Investment Fund v. United States – Fifth Circuit Decision ...319
Schering-Plough Corp. v. United States...320
ConEd v. United States...325
ConEd v. United States – Court of Federal Claims ...326
Wells Fargo v. United States – Court of Federal Claims ...330
Country Pine Finance, LLC v. Commissioner...336
Fidelity International v. United States...339
Fidelity International v. United States – District Court Decision ...340
Canal Corp. v. Commissioner...342
Economic Substance – Transaction Planning...345
Sale to Recognize Loss ...346
Accelerating a Built-In Gain...347
Busting Consolidation – Example 1 ...348
Busting Consolidation – Example 2 ...349
Avoiding Loss Disallowance Rules ...350
Section 331 Liquidation ...351
Section 332 Liquidation ...352
Purchase and Liquidation...353
Liquidation and Sale ...354
Check-and-Sell Transaction...355
Busted Section 351 Transaction to Make Section 338(h)(10) Election ...356
Section 351 Transaction with Built-in Loss Asset ...357
“C” Reorganization...358
‘D’ Reorganizations – Cash – Rev. Rul. 70-240 ...359
All-Cash ‘D’ Reorganizations – Consolidation ...360
All-Cash ‘D’ Reorganizations – Foreign-to-Foreign...361
Section 304 Cross-Border Transaction ...362
Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act of 2010, P.L. 111-312
• Signed into law on December 17, 2010.
• The bill was enacted without any revenue offsets, as it was exempt from pay-go requirements because it was designated as emergency legislation.
• The enacted bill includes the following provisions:
– Extends for two years (through 2012) all of the 2001 and 2003 individual income tax cuts.
– Extends the current capital gains and dividend rates for all individual taxpayers for an additional two years (through 2012).
– Provides a 2-percent reduction in payroll taxes for 2011.
– Provides a one-year reauthorization of federal unemployment insurance benefits.
– Extends individual alternative minimum tax relief for two years (through 2011).
– Increases the estate tax exemption to $5 million and reduces the top rate to 35 percent for 2011 and 2012.
– Extends bonus depreciation allowed for investments in new business equipment (through 2012).
– Extends for one year the Section 1603 grants in lieu of credits program for renewable energy in the American Recovery and Reinvestment Act.
– Reinstates for two years (through 2011) the section 41 research credit.
– Extends for two years (through 2011) the active financing exception from Subpart F of the Code.
– Extends for two years (through 2011) the current law look-through treatment of payments between related controlled foreign corporations.
Education Jobs and Medicaid
Assistance Act, P.L. 111-226
•
Signed into law on August 10, 2010.
•
Revenue offsets in the bill include several changes to U.S. international tax
rules, including:
–
Rules to prevent splitting foreign tax credits from income to which they
relate,
–
Denial of foreign tax credit with respect to foreign income not subject to U.S.
tax by reason of covered asset acquisitions,
–
Separate application of foreign tax credit limitation to items resourced under
treaties,
–
Limitation on the amount of foreign taxes deemed paid with respect to
section 956 inclusions,
–
Modification of affiliation rules for purposes of allocating interest expense,
–
Termination of special rules for interest and dividends received from
persons meeting the 80-percent foreign business requirements, and
–
A special rule with respect to Section 304 deemed redemptions by foreign
subsidiaries
.Section 304 Redemptions by Foreign Subsidiaries
Parent Sub 1 Sub 2 Cash (treated as dividend through sections 304 and 302) Stock in Sub 1Background – General Rules Under Section 304
• When Sub 2 purchases stock of Sub 1 from Parent, Section 304(a)(2) deems the cash received by Parent to be the proceeds of a redemption of the stock of Sub 1.
• Since Parent directly or indirectly owns 100% of the stock of Sub 1 both before and after the deemed redemption, the cash is essentially equivalent to a dividend under Section 302(d).
• Under Section 304(b), the dividend received by Parent is sourced first from the E&P of the acquiring corporation (Sub 2) and then from the E&P of the target corporation (Sub 1).
– The portion of the deemed dividend sourced from the acquiring corporation (Sub 2) is considered to “hopscotch” over Sub 1 and be paid directly by Sub 2 to the transferor (Parent).
Section 304 Redemptions by Foreign Subsidiaries
Using Section 304 to Avoid U.S. Tax on the Earnings of a Non-U.S. Subsidiary
• If Foreign Parent owns a U.S. corporation (U.S. Sub 1) that in turn owns a foreign subsidiary (Foreign Sub 2), the earnings of Foreign Sub 2 are generally subject to U.S. tax at two levels:
– When the earnings are distributed as a dividend to U.S. Sub 1 they are subject to corporate income tax.
– When U.S. Sub 1 distributes the earnings to Foreign Parent, a 30-percent withholding tax generally applies (absent a specific treaty provision).
• Under Section 304, if Foreign Parent sells stock in U.S. Sub 1 with no E&P to Foreign Sub 2 with lots of E&P, the cash received by Foreign Parent is generally treated as a dividend directly from Foreign Sub 2 to Foreign Parent.
– This deemed dividend hopscotches directly from Foreign Sub 2 to Foreign Parent, thus bypassing U.S. Sub 1 and avoiding U.S. tax.
– The deemed dividend also depletes the E&P of Foreign Sub 2 so it is not available to be taxed on a future
distribution of cash from Foreign Sub 2 to U.S. Sub 1 (or under Section 1248 on a future sale by U.S. Sub 1 of its stock in Foreign Sub 2).
Foreign Parent U.S. Sub 1 Foreign Sub 2 Cash (treated as dividend through sections 304 and 302) Stock in U.S. Sub 1
Section 304 Redemptions by Foreign Subsidiaries
Foreign Parent U.S. Sub 1 Foreign Sub 2 Cash (treated as dividend through sections 304 and 302) Stock in U.S. Sub 1 New Section 304(b)(5)(B)• New Section 304(b)(5)(B) eliminates this planning opportunity by generally preventing Foreign Sub 2’s E&P from being included in the deemed dividend to Foreign Parent. As a result, the deemed dividend would include only the E&P of the target corporation (U.S. Sub 1).
– This makes more of U.S. Sub 1’s E&P available to be included in the deemed dividend to Foreign Parent,
thereby increasing the potential for U.S. withholding tax to apply to the transaction.
– It also preserves Foreign Sub 2’s E&P to be taxed in the U.S. on a future distribution of cash from Foreign Sub 2 to U.S. Sub 1 (or under Section 1248 on a future sale by U.S. Sub 1 of its stock in Foreign Sub 2).
• Section 304(b)(5)(B) applies to a Section 304 acquisition by a foreign corporation unless 50% or more of the deemed dividend would be either (i) subject to current taxation in the U.S. or (ii) includable in the E&P of a CFC.
• Regulations are anticipated to provide a rule that would prevent the avoidance of this provision through the use of partnerships, options, or other arrangements to cause a foreign corporation to be treated as a CFC.
Job Creation and Tax Cut Act of 2010
(previous tax extenders bill)
Legislative History
•
December 7, 2009: The original extenders bill (the Tax Extenders Act of
2009) was introduced in the House.
•
December 9, 2009: The House passed the original version of the bill.
•
March 10, 2010: The Senate passed an amended extenders bill (the
American Workers, State and Business Relief Act of 2010).
•
May 28, 2010: The House passed another amended version of the
extenders bill (the American Jobs and Closing Tax Loopholes Act of 2010).
•
September 16, 2010: A new extenders bill was introduced in the Senate
(the Job Creation and Tax Cut Act of 2010).
•
December 17, 2010: The Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 was signed into law, which
contains many of the extenders previously included in the Job Creation and
Tax Cut Act of 2010 without any offsetting revenue raisers.
Job Creation and Tax Cut Act of 2010
Primary Revenue Offsets
•
Increase oil spill liability trust fund tax
•
Denial of deduction for punitive damages
•
Extension of customs user fees
•
Unemployment insurance overpayment reform
•
Gain on the distribution of “securities” in certain divisive D reorganizations
•
Repeal of boot-within-gain limitation under Section 356
9
Gain Recognized in Certain Divisive D
Reorganizations
Distributing Controlled Controlled Stock + Controlled Debt Securities + Boot Assets Distributing Distributing Shareholders Controlled Stock Distributing Creditors Controlled Debt Securities + Boot Current Law• Under Section 361(a), Distributing recognizes no gain or loss on the transfer of assets to Controlled in exchange for stock or debt securities of Controlled in connection with a Section 355 transaction.
– This rule applies regardless of whether the value of the Controlled stock and securities exceeds the tax basis of the net assets transferred by Distributing to Controlled.
• Under section 361(b), Distributing generally recognizes gain on the transfer of assets to Controlled if Distributing receives in exchange, in addition to Controlled stock or securities, “other property” or “boot.”
– Under Section 361(b)(1)(A), Distributing can “cleanse” the boot and not recognize gain if it distributes the boot in pursuance of the plan of reorganization.
– Under a special rule in Section 361(b)(3), a distribution of boot by Distributing to its creditors is treated as a distribution in pursuance of the plan of reorganization. However, this special rule does not apply to boot transferred by
Distributing to its creditors in excess of the tax basis of the net assets Distributing transfers to Controlled (i.e., in excess of the tax basis of the transferred assets net of liabilities assumed by Controlled).
– Thus, if Distributing distributes boot it receives from Controlled to repay its creditors, Distributing will recognize taxable gain to the extent the boot exceeds the tax basis of the net assets transferred to Controlled.
• However, because Controlled’s debt securities are not treated as boot, Distributing can use Controlled’s securities to retire its own debt without the recognition of gain, even where the value of these securities exceeds Distributing’s basis in the
Gain Recognized in Certain Divisive D
Reorganizations
Proposal
• The bill provides that, in the case of a divisive D reorganization, securities and non-qualified preferred stock of Controlled are treated as “other property” or “boot” under section 361.
– Consequently, under section 361(b), Distributing will recognize gain to the extent it receives boot, including Controlled securities and nonqualified preferred stock, that it does not distribute in the Section 355 transaction.
– Distributing can “cleanse” the boot it receives, including Controlled securities and nonqualified preferred stock, and not recognize gain by transferring the boot to Distributing’s creditors, but only to the extent the boot (including the
Controlled securities and nonqualified preferred stock) does not exceed the adjusted basis of the assets transferred to Controlled. Distributing Controlled Controlled Stock + Controlled Debt Securities Assets Distributing Distributing Shareholders Controlled Stock Distributing Creditors Controlled Debt Securities
Repeal of Boot-Within-Gain Limitation
Current Law
• In general, gain or loss is not recognized with respect to exchanges of stock and securities in corporate reorganizations.
• Under section 356, a recipient of money or other property (“boot”) in a tax-free reorganization recognizes gain (if any) on the transaction in an amount not in excess of the sum of such money and the fair market value of such other property.
– Under section 356(a)(2), if the exchange has the effect of the distribution of a dividend, then all or part of the gain recognized by the exchanging shareholder is treated as a dividend to the extent of the shareholder’s ratable share of the corporation’s E&P.
– The remainder of the gain (if any) is treated as gain from the exchange of property.
• Accordingly, if a shareholder receives boot in connection with a corporate reorganization, the amount that the shareholder is required to recognize as income is limited to the amount of gain realized in the exchange (i.e., the boot-within-gain limitation).
– This rule applies regardless of whether the property received would otherwise be considered to be a dividend for tax purposes.
Repeal of Boot-Within-Gain Limitation
Example of Perceived Abuse
• In cross-border transactions, U.S. shareholders can utilize the boot-within-gain limitation to repatriate previously untaxed earnings and profits of foreign subsidiaries with minimal U.S. tax consequences.
• The above transaction should be treated as a valid “D” reorganization. See Treas. Reg. § 1.368-2(l).
– U.S. Parent will recognize gain under Section 356 on the lesser of (i) the cash it receives in the liquidation of CFC1 and (ii) its gain in its CFC1 stock.
– If U.S. Parent’s stock in CFC1 has little or no built-in gain, U.S. Parent will recognize little or no gain.
• This is the result regardless of whether the boot is potentially taxable as a dividend or as capital gain under Section 356.
(1)
CFC1
Cash CFC1 AssetsU.S.
Parent
CFC2
(2)
LiquidationRepeal of Boot-Within-Gain Limitation
Proposal
•
The bill would repeal the boot-within-gain limitation in the case of any reorganization
transaction (domestic or cross-border) if the exchange has the effect of the
distribution of a dividend.
–
The amount of money or other property distributed would generally be treated as
a dividend to the extent of the corporation’s E&P.
•
In the case of an acquisitive reorganization under section 368(a)(1)(D), or any other
type of reorganization specified by the Secretary, the provision requires that the
amount treated as a dividend include the E&P of each corporation that is a party to
the reorganization, and that the amount of the dividend (and the source thereof) be
determined under rules similar to those in sections 304(b)(2) and 304(b)(5).
•
The provision also imposes a rule similar to the rule of section 312(n)(7) (adjustments
to E&P) to the extent a distribution is treated as an exchange to which section
356(a)(1) applies.
Carried Interest Proposal
Current Law
•
Partners who receive partnership interests in exchange for services may receive
interests in future partnership profits, i.e., a “profits” or “carried” interest.
–
A partnership is not subject to federal income tax, and an item of income or loss
of the partnership retains its character and flows through to the partners, who
include the item on their tax returns.
–
Consequently, to the extent a partnership recognizes long-term capital gain,
partners who provide services reflect their shares of such gain as long-term
capital gain.
•
Allowing service partners to receive capital gains treatment is viewed by some
policymakers as creating an unfair and inefficient tax preference.
–
The increased activity among large private equity firms and hedge funds has
increased the cost of this preference.
–
Thus, a service provider’s share of the income of a partnership attributable to a
carried interest should be taxed as ordinary income and subject to self-
Carried Interest Proposal
Proposal
• The bill would enact new section 710, which is generally intended to treat net income from an investment services partnership interest (“ISPI”) as ordinary income, regardless of the character of the income at the partnership level, except to the extent it is attributable to a return on invested capital.
• An ISPI is a partnership interest held by any person if it was reasonably expected (at the time the person acquired the partnership interest) that the person would provide, or already has provided, a substantial quantity of certain services with respect to specified assets held by the partnership.
– Such services include (i) advising as to the advisability of investing in, purchasing, or selling any specified asset, (ii) managing, acquiring, or disposing of any specified asset, (iii) arranging financing with respect to acquiring specified assets, and (iv) any activity in support of any of the foregoing services.
– For this purpose, specified assets include (i) securities, (ii) real estate held for rental or investment, (iii) interests in partnerships, (iv) commodities, or (v) options or derivative contracts with respect to such securities, real estate, partnership interests, or commodities.
• The provision provides a narrow exception for items of income, gain, loss, and deduction that are allocated to the portion of an ISPI that is a qualified capital interest.
– This exception is intended to apply to capital invested in the partnership by the service provider if the investment is made on the same terms as investments of capital by partners not providing services.
– The exception for qualified capital interests is only applicable if:
• (i) items are allocated to the service providing partner’s qualified capital interest in the same manner as the items are allocated to other qualified capital interests of partners that do not provide any of the identified investment management services and that are not related to the service-providing partner, and
• (ii) the allocations made to the qualified capital interests of unrelated nonservice providing partners are significant compared to the allocations made to the service partner’s qualified capital interest.
– An additional, but equally narrow, exception is contained in the most recent Senate amendment if all distributions and allocations of a partnership are made pro rata based on capital.
Carried Interest Proposal
Proposal (cont’d)
• The operative rules of section 710 extend beyond the recharacterization of income as ordinary.
– Gain on the disposition of an ISPI is treated as ordinary income and is generally recognized notwithstanding any other non-recognition provision provided in the Code.
– Ordinary income is generally triggered on the distribution of property to a holder of an ISPI.
– Although losses would be ordinary to the extent of aggregate net income, losses in excess of such income would be deferred until a future allocation of income (or a sale or redemption of the ISPI).
• Some of the rules applicable to ISPIs can also apply if (i) a person performs investment management services for any entity in which such person holds a disqualified interest, and (ii) the value of the interest is substantially related to the amount of income or gain from the assets with respect to which the investment management services are performed.
– A disqualified interest means (i) any interest in such entity other than indebtedness, (ii) convertible or
contingent debt of such entity, (iii) any option or other right to acquire property described above, and (iv) any derivative instrument entered into with such entity or any investor in such entity.
– A disqualified interest generally does not include a partnership interest or an interest in a corporation.
• With respect to individual taxpayers, the general rule recharacterizing income and loss as ordinary applies only to the applicable percentage of the net income or net loss.
– Under the most recent House-passed bill, the applicable percentage would initially be 50 percent, but would increase to 75 percent for taxable years beginning after December 31, 2012.
– Under the most recent Senate amendment, the applicable percentage would be 75 percent. However, the applicable percentage is reduced to 50 percent for carried interests that are attributable to the sale of assets held for 5 or more years.
Analysis of Carried Interest Proposal
•
Proposal would apply beyond the classic “carry” business
structure
•
Does not require managing other people’s money
•
Not just to individuals
•
Corporations and partnerships
•
Across all industries
•
Expansive application results from:
•
Broad definition of ISPI
•
Narrow exception for Qualified Capital Interests (QCIs)
Investment Services Partnership Interest
(ISPI)
•
Definition: any interest in a partnership which
is held (directly or indirectly) by any person if it
was reasonably expected (at the time that
such person acquired such interest) that such
person (or any person related to such person)
would provide (directly or indirectly) a
substantial quantity of any listed services with
respect to the assets held by the partnership
Definition of ISPI is broad
•
“Specified assets”
–
Securities, including stock, certain partnership interests, notes, bonds, other debts
–
Real estate held for rental or investment
–
Partnership interests
–
Commodities
–
Options
–
Derivative contracts
–
No de minimis rule for size of holdings
•
“Listed services”
–
Advising on purchasing or selling specified assets
–
Managing, acquiring, or disposing of specified assets
–
Arranging financing regarding specified assets
–
Reasonably expected that services would be provided at the time partnership
interest is acquired
–
Change in services provided can cause an interest to become an ISPI
•
Performance of a “substantial quantity” of listed services
–
Services can be provided directly with respect to specified assets or indirectly with
respect to operating businesses of entities owned by such partnership
Potential ISPIs in ordinary course
business structures
–
Non-service providers
•
Services of related persons taint non-service providers
•
A partnership solely among members that holds a specified asset if any
related party provides a substantial quantity of listed services
–
Tiered structures
•
Lower-tier partnership (LTP) treated as a specified asset (of the upper-
tier partnership) even if LTP holds no specified assets
•
Subsidiary stock treated as a specified asset
–
Partners of operating joint ventures
Tiered structure
•
P, S1 and S2 are members of a
consolidated group
•
PRS’s only asset is the stock of OpCo
•
OpCo is a manufacturing company
•
All the officers and directors in OpCo are
also the officers and directors of PRS, S1
and S2
P
PRS
S1
S2
Partners of operating joint ventures
•
Corp A and Corp B enter into an
arrangement to jointly develop technology
which is treated as a partnership for
federal tax purposes
•
Corp A and Corp B will both be involved in
managing the operation of the PRS
business
PRS
Corp A
Corp B
OpCo
Qualified capital interest (QCI) exception
is narrow
–
QCI - generally the portion of an ISPI attributable to cash and property
contributions and undistributed net income/gain allocations
–
QCI is not always usable
•
Applies only if allocations attributable to the ISPI holder’s QCI are made
in the same manner as allocations to other QCI partners:
–
Who do not provide
any
services
–
Who are not related to the ISPI holder and
–
Whose allocations are significant relative to the allocations made to
the ISPI holder’s QCI
–
An ISPI is not a QCI if the ISPI holder’s capital interest is acquired with
proceeds from a loan made, or guaranteed, by another partner or the
partnership (or a person related to another partner or the partnership)
QCI Exception – No help without a non-
service provider
•
Corp A and Corp B enter into an
arrangement to jointly develop technology
which is treated as a partnership for
federal tax purposes
•
Corp A and Corp B will both be involved in
managing the operation of the PRS
business
PRS
Corp A
Corp B
QCI Exception – No help for controlled
group partnership
•
S2 is involved in managing the
OpCo business
P
PRS
S1
S2
OpCo
Listed ServicesConsequences relevant to corporations
–
Limits allowable net losses to the extent of post-enactment net income
–
Most “nonrecognition” transfers are taxed
•
Includes pre-enactment appreciation
•
Limited exception available for transfers to partnerships, and
partnership mergers, divisions and technical terminations
–
Recharacterizes certain amounts of non-ordinary items as ordinary
items
Loss limitation / suspension
•
P, S1 and S2 are members of a
consolidated group
•
Assume S1’s and S2’s interests in PRS
are ISPIs
•
For the year ending 12/31/2010 PRS has
$200 of loss
P
PRS
S1
S2
Specified AssetsNonrecognition transfers are taxed
Section 351 transfers
•
S2 contributes its PRS interest to Newco
in a transaction qualifying under Section
351
•
At the time of the contribution the fair
market value of S2’s interest in PRS
exceeds its basis
S1
P
PRS
S2
Newco
PRS
Merger
“Tax-free” acquisition of target
PRS
T
P
•
T merges into P with P surviving
•
At the time of the merger, the FMV of
T’s interest in PRS exceeds its basis
therein
OpCo
Other Partner
American Recovery and Reinvestment Act of 2009
•
On February 17, 2009, President Obama signed into law the American
Recovery and Reinvestment Act of 2009 (the “Recovery Act”), Pub. L. 111-
5. The Recovery Act was designed to stimulate economic recovery, and
included about $290 billion in tax incentives.
•
The Recovery Act included the following business tax provisions:
–
Amendment to section 382 to prevent the loss limitation rules from
applying to certain ownership changes occurring by reason of EESA
restructuring plans (targeting GM).
–
Amendment to section 108 to allow the deferral of certain COD income
and subsequent taxable inclusion over a 5-year period.
–
Amendment to section 172 to permit to allow three-, four-, or five-year
carrybacks of net operating losses (“NOLs”) for small businesses.
–
Repeal of Notice 2008-83, which interpreted section 382 as allowing
acquiring banks to claim built-in losses from acquired banks.
–
Extension of enhanced small business expensing.
–
Extension of bonus depreciation.
–
Incentives to hire unemployed veterans and disconnected youth.
–
Increase in New Markets tax credit.
•
The Recovery Act also included various individual income tax provisions
and renewable energy tax provisions.
•
Section 1262 of the Recovery Act added subsection (n) to Section 382.
•
Section 382(n) prevents the application of section 382 to an ownership
change that:
–
Occurs under a restructuring plan required under a loan agreement or a
commitment for a line of credit entered into with the United States under
the EESA, and
–
Is intended to result in a rationalization of the costs, capitalization, and
capacity with regard to the manufacturing workforce of, and suppliers to,
the taxpayer and its subsidiaries.
•
Section 382(n) does not apply to subsequent ownership changes, unless
that change is also described by this provision.
•
Section 382(n) does not apply if, immediately after the change, any person,
(other than a voluntary employees’ beneficiary association) owns stock of
the loss corporation possessing at least 50% of vote or value.
–
Related persons, as defined by section 267(b) or 707(b), and groups of
persons acting in concert, are treated as a single person.
•
This rule is effective for ownership changes after February 17, 2009.
• Section 1261 of the Recovery Act revokes Notice 2008-83.
– The IRS issued Notice 2008-83 on September 30, 2008, regarding the built-in loss rules of section 382(h) for loans or bad debts following the acquisition of a bank.
– Section 382 limited the ability of loss corporation to recognize losses attributable to built-in loss assets or deductions attributable to periods prior to an ownership change.
– Notice 2008-83 provided that any deduction properly allowed after an ownership change to a bank with respect to losses on loans or bad debts shall not be treated as attributable to
periods prior to an ownership change.
• Section 1261(a) of the Recovery Act sets forth the following findings:
– The Secretary of the Treasury was not delegated authority under Section 382(m) to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers, and it is doubtful that the IRS has legal authority to prescribe such a notice.
– Notice 2008-83 was inconsistent with the congressional intent of Section 382(m).
• Recovery Act Section 1261(b) states that Notice 2008-83 remains effective for ownership changes occurring on or before January 16, 2009, but has no force or effect for ownership changes after that date.
– Exception: The notice remains effective for ownership changes after January 16, 2009 if the change is (i) pursuant to a written binding contract entered into on or before January 16, 2009, or (ii) pursuant to a written agreement entered into on or before January 16, 2009 and the agreement was described on or before January 16, 2009 in a public announcement or in a filing with the SEC required by reason of such ownership change.
•
Section 1231 of the Recovery Act added subsection (i) to section 108.
•
In general, a taxpayer may elect under section 108(i) to include COD income from the
reacquisition of an “applicable debt instrument” in gross income ratably over a 5-year
period (rather than including the entire COD income in the year of the reacquisition).
–
The five-year period for recognition of COD income begins with the fifth tax year
following the tax year in which the reacquisition occurs if the reacquisition occurs in
2009.
•
An election under section 108(i) precludes the taxpayer from excluding the COD
income under section 108(a) (with a potential reduction of attributes under section
108(b)) for the year of reacquisition as well as any subsequent year.
•
The section 108(i) election is irrevocable.
•
Section 108(i)(2) defers deductions related to OID in debt-to-debt exchanges (including
exchanges resulting from significant modifications) to match the deferral of income
when a debtor makes a section 108(i) election.
Amendment of Section 172: Small Business NOL
•
Section 1211 of the Recovery Act amended section 172 to allow eligible
businesses to elect a 3, 4, or 5-year carryback period for a “2008 NOL”
instead of the general two-year carryback.
–
A business is eligible if it is a “small business.”
–
A “2008 NOL” refers to a NOL for a tax year ending in 2008 or, upon an
election by a taxpayer, for a tax year beginning in 2008.
•
A "small business" generally refers to a corporation or a partnership (or a
sole proprietorship if it were a corporation) whose average annual gross
receipts for a three-tax-year period are $15 million or less.
•
This law is effective for NOLs arising in tax years ending after December
31, 2007. Transitional rules are provided for tax years ending before
Worker, Homeownership, and Business Assistance Act of 2009
•
On November 6, 2009, President Obama signed the Worker, Homeownership, and
Business Assistance Act of 2009 (the “Assistance Act of 2009”).
•
The Assistance Act of 2009 contained several tax provisions, including
--– Extension and modification of the first-time homebuyer credit,
– Expansion of eligibility for and NOLs subject to temporary 5-year operating loss carryback provision added by the Recovery Act,
– Delay of the implementation of worldwide interest allocation,
– Modification of penalty for failure to file partnership or S corporation returns,
– Expansion of electronic filing by return preparers,
– Exclusion from gross income of qualified military base realignment and closure fringe, and
Worker, Homeownership, and Business Assistance Act of 2009
•
The Assistance Act of 2009 extended the election to increase the carryback period to a 3,
4, or 5-year carryback period to 2009 NOLs (i.e., operating losses from taxable years
ending after December 31, 2007, and beginning before January 1, 2010, are now
covered).
–
The election is available to all taxpayers rather than only eligible small businesses.
•
A separate change under section 810 was made to permit life insurance
companies to carryback 2008 or 2009 operating losses for 4 or 5 taxable years.
–
The amount of a NOL carried back to the 5
thtaxable year is limited to 50% of taxable
income for that year, with the excess NOLs carried forward.
•
The limitation will not affect eligible small businesses that made elections under
the Recovery Act.
–
A taxpayer must make the election by the extended due date for filing the return for
the taxpayer’s last taxable year beginning in 2009, and in such manner as may be
prescribed by the Secretary.
–
An election will be irrevocable.
•
The IRS issued Rev. Proc. 2009-52 on November 20, 2009, to provide guidance under the
temporary NOL carryback provision. On June 23, 2010, the IRS and Treasury issued
temporary regulations on the implementation of the temporary NOL carryback provision
within a consolidated group. The IRS later issued Notice 2010-58 on August 20, 2010,
which provides further guidance on the temporary NOL carryback provision in a Q&A
format.
Background
• In Announcement 2010-9 (issued January 16, 2010), the IRS introduced a proposed reporting requirement on certain business taxpayers to provide information about uncertain tax positions affecting their federal income tax liability.
– In Announcement 2010-17 (issued March 5, 2010), the IRS extended the comment period for the proposal and stated that it planned to require the filing of the new schedule for returns relating to calendar year 2010 and for fiscal years that begin in 2010.
– In Announcement 2010-30 (issued April 19, 2010), the IRS announced the release of the draft schedule (“Schedule UTP”) and instructions, comments on which were due by June 1, 2010.
• On September 9, 2010, the IRS and Treasury issued proposed regulations authorizing the IRS to require certain corporations (as set out in forms, publications or instructions, or other guidance) to provide information concerning uncertain tax positions concurrent with the filing of a return.
– The proposed regulations appear to have been in response to criticisms that the IRS and Treasury lack the authority to require taxpayers to file Schedule UTP.
– On December 15, 2010, final regulations were published without any substantive changes.
• On September 24, 2010, the IRS released the final Schedule UTP and its instructions.
– Changes from the draft Schedule UTP and instructions are detailed in the contemporaneously issued Announcement 2010-75.
– The IRS also released a directive to the field to provide guidance on the implementation of Schedule UTP, as well as a separate announcement (Announcement 2010-76) regarding modifications to the policy of restraint.
Final Schedule UTP – Significant Changes from Draft Schedule
•
Five-year phase-in of the reporting requirement based on a
corporation’s asset size.
•
No reporting of the rationale and nature of uncertainty in the concise
description of the position.
•
No reporting of a maximum tax adjustment.
•
No reporting of tax positions for which no reserve was created due
to a widely-understood administrative practice.
Schedule UTP
Schedule UTP Filing Requirement• In general, for 2010 tax years, Schedule UTP requires a corporation with assets equal to or
exceeding $100 million to report its U.S. federal income tax positions for which the corporation or a related party has (i) recorded a reserve in an audited financial statement or (ii) not recorded a reserve because the corporation expects to litigate the position.
– Corporations are required to file a 2010 Schedule UTP with income tax returns for the
calendar year 2010 and fiscal years that begin in 2010 and end in 2011. A corporation is not required to file a Schedule UTP for a short tax year that ends in 2010.
– Corporations are not required to report a tax position taken in a tax year beginning before January 1, 2010, even if a reserve is recorded with respect to that tax position in audited financial statements issued in 2010 or later.
• The final Schedule UTP and instructions require only corporations filing a Form 1120, Form 1120- F, Form 1120-L, or Form 1120-PC to file a 2010 Schedule UTP. The IRS will consider whether to extend all or a portion of Schedule UTP reporting to other taxpayers for 2011 or later tax years, such as pass-through entities and tax exempt entities.
• The IRS has implemented a five-year phase-in of Schedule UTP for corporations with assets under $100 million.
– The total asset threshold will be reduced to $50 million starting with 2012 tax years and to $10 million starting with 2014 tax years.
• The final instructions do not exclude taxpayers in the Compliance Assurance Program (CAP) from the Schedule UTP filing requirement.
Schedule UTP
Reporting of Uncertain Tax Positions on Schedule UTP
• A corporation or a related party records a reserve for a U.S. federal income tax position when a reserve for income tax, interest, or penalties with respect to that position is recorded in audited financial statements of the corporation or a related party.
– A tax position is taken in a tax return if it would result in an adjustment to a line item on that tax return (or would be included in a section 481(a) adjustment) if the position is not sustained.
– Audited financial statements mean financial statements on which an independent auditor has expressed an opinion under GAAP, IFRS, or another country-specific accounting standard, including a modified version of any of the above. Compiled or reviewed financial statements are not audited financial statements.
– The initial recording of a reserve triggers reporting of a tax position taken on a return. Subsequent reserve increases or decreases, however, do not.
• A corporation must report on Schedule UTP a tax position for which no reserve was recorded based on an expectation to litigate.
– This occurs if the corporation or a related party determines the probability of settling with the IRS to be less than 50 percent and, under applicable accounting standards, no reserve was recorded because the
corporation intends to litigate the position and has determined that it is more likely than not to prevail on the merits in the litigation.
• Schedule UTP and its instructions define a related party broadly to include any entity that is related to the corporation under sections 267(b), 318(a), or 707(b), or any entity that is included in a consolidated audited financial statement in which the corporation is also included.
– The final schedule contains a box that must be checked if the corporation is unable to obtain information from related parties sufficient to determine whether a tax position must be disclosed.
• Schedule UTP generally requires the reporting of current year and prior year uncertain tax positions.
– The portion of Schedule UTP relating to prior year uncertain tax positions will be used in tax years after 2010 to report tax positions taken by the corporation in a prior tax year that have not been reported on a prior year’s tax return.
– A corporation is generally not required to report a tax position it has taken in a prior year if the corporation reported that tax position on a Schedule UTP filed with a prior year tax return. However, an exception applies if there is a transaction that results in tax positions taken in more than one tax return.
Schedule UTP
Information Required in Schedule UTP
• A corporation must provide a concise description of each uncertain tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to
apprise the IRS of the identity of the tax position and the nature of the issue. According to the IRS, this description should, in most cases, not exceed a few sentences.
– The final Schedule UTP instructions expressly provide that a concise description should not include an assessment of the hazards of a tax position or an analysis of the support for or against the tax position.
– The instructions contain several examples of what constitutes an acceptable concise description.
• A corporation must rank by size each uncertain tax position (including transfer pricing and other valuation positions) reported on Schedule UTP.
– The size of each tax position is determined on an annual basis and is the amount of U.S. federal income tax reserve recorded for that position. The size of a tax position, however, is not required to be reported on Schedule UTP.
• If a reserve is recorded for multiple tax positions, then a reasonable allocation of that reserve among the tax positions to which it relates must be made in determining the size of each tax position.
• For an affiliated group filing a consolidated return, the determination of the size of a tax position taken on such return is determined at the affiliated group level for all members of the affiliated group.
• In ranking its uncertain tax positions, a corporation must specify whether a tax position is a transfer pricing position.
– A corporation must also indicate on the Schedule UTP if an uncertain tax position is a “major tax position.”
• An uncertain tax position is a major tax position if the reserve exceeds 10 percent of the aggregate amount of the reserves for all of the tax positions reported on the Schedule UTP.
– The final instructions provide that no size needs to be determined for uncertain tax positions based on an expectation to litigate, which can be assigned any rank. Further, such positions are disregarded for purposes of the major tax position calculation.
